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Josh Rosner: "Could Violations of PSAs Dwarf Lehman Weekend?" Yves Smith naked capitalism

(PSA=Pooling and Servicing Agreements)

Josh Rosner, a well respected bank analyst (he describes himself as "a recovering GSE analyst") is circulating a client note and it takes the foreclosure crisis very seriously. The critical part is his discussion of the conveyance chain. As we indicated before, the minimum chain for a recent mortgage securitization is is A (originator) => B (sponsor) => C (custodian) => D (trust). Older deals might only have three parties, but recent vintage typically had at least four, and some as many as seven or eight.

The reason for doing this is bankruptcy remoteness. You as the buyer of a mortgage backed security want certainty in what you purchased. If an originator goes bust (as ironically many did), you don't want the creditors to say, "They were already toast by the time they set up that MBS, so the sale of the loans was a fraudulent conveyance, we are gonna take the loans back."

The way to prevent that was to introduce intermediary parties between the originator and the trust. Each party had to be independent (which meant fit the legal definition of independence; the intermediary parties and even many originators were dependent on financing called warehouse lines from the investment bank packager/distributors). The note (the borrower IOU) had to be endorsed (like a check) to the next party in the chain, who then endorsed it over to the party after that, with the last party being the trust.

Rosner's remarks are consistent with our prior posts, and he adds a couple of important additional observations: We have a larger and more significant concern, which, if proved out, could call into
question the validity of nearly all securitizations and raise material questions about
whether "true sale" was achieved.  

   Nearly all Pooling and Servicing Agreements require that "On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser's rights under this Agreement (to the extent set forth in Section 15)". Also, an Assignment of Mortgage must accompany each note and this almost never happen.

    We believe nearly every single loan transferred was transferred to the Trust in "blank" name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA.

    Rather than continue to fight for the "put-back" of individual loans the investors may be able to sue for and argue that the "true sale" was never achieved. To think of it simply, if you go to sell your car and you endorse your title but neither you nor the party you are selling it to sign their name who owns the car? It appears you likely still do.

    While there may be a view that the government can intervene it appears that the private contract spelling out the terms was violated at the transfer point. The Trustee, who has responsibility to make sure all loans were properly assigned to the trust, may have liability. So too might the lawyers who issued the legal opinions.


Obama might try to help Wall Street, but, in the end, it could well be the sharks turning on one another that ends the fiasco. It might not be a good time to have been one of the institutions that provided "warehouse lines" of credit to the various "mortgage brokers" who originated the loans under the "originate to sell" model, especially if your institution was also involved in servicing the mortgages and is securitizing them. Given how things were going in 2004 it seems unlikely that anyone in any particular chain was truly independent. It's getting interestinger and interestinger.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Oct 12th, 2010 at 04:44:29 PM EST
[ Parent ]
Yea, it gets interesting, but I just think that means the con that will be put in place to save the finance industry will be more damaging to the interests of the dumb schmucks who bought that shit home owners

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Tue Oct 12th, 2010 at 05:19:26 PM EST
[ Parent ]
Doesn't the latest version just mean that none of the loan transfers were legal, so that the homeowner is simply liable to the mortgage originator (assuming the latter has kept his records....)?
by gk (g k quattro due due sette "at" gmail.com) on Wed Oct 13th, 2010 at 02:48:38 AM EST
[ Parent ]
I am not a lawyer, but it seems to me that homeowners finding problems with the chain of custody for their mortgage might be justified in making payments into an escrow account. The situation is genuinely FUBAR.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Oct 13th, 2010 at 01:56:53 PM EST
[ Parent ]
Associated Press

NEW YORK (AP) -- In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in "foreclosure expert" jobs with no formal training, a Florida lawyer says.

In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn't define the word "affidavit." Others didn't know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers' accusations about document fraud.



Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Oct 12th, 2010 at 08:31:05 PM EST
[ Parent ]
Oh lord.  Their own employees are admitting incompetence and fraud.

This gets better all the time.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Tue Oct 12th, 2010 at 10:11:25 PM EST
[ Parent ]
But didn't you know? Fraud on the court is just a technical matter. It is fortunate that the biggies are about to go to legal/financial Armageddon. I don't get the feeling that, otherwise, The US Department of Justice would do anything about these "technical" problems.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Oct 12th, 2010 at 10:58:13 PM EST
[ Parent ]
IANAL

Fraud is a tort and thus someone who commits fraud is open to a Civil Action.  

Knowingly committing a fraud rips the corporate shield, thus the Board of Directors and management become personally liable to the victim for compensation.

How that can play-out is anybody's guess.


Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Oct 13th, 2010 at 02:27:02 AM EST
[ Parent ]
Foreclosure Fraud: It's Worse Than You Think   Diana Olick  CNBC Real Estate Reporter  (H/T Business Insider)

A source of mine pointed me to a recent conference call Citigroup had with investors/clients.  It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."

The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.

The issue is in that final stage getting to the trust. The law demands that when the papers get moved around they are "wet ink," that is, real signatures on real paper. But Prof. Levin tells me that's not the worst of it. Affidavits assigned to the notes and security instruments are supposed to be endorsed over to the trust at the time of sale, but in many foreclosure scenarios the affidavits have been backdated illegally.

So with the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:

The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.

Josh Rosner, of Graham-Fisher, put the following out in a note today, claiming violations of pooling and servicing agreements on mortgages could dwarf the Lehman weekend:

   Nearly all Pooling and Servicing Agreements require that... (See quote in Yves article above. It is more complete.)




As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Oct 13th, 2010 at 12:37:40 AM EST
[ Parent ]
And there is an interesting comment thread at the Business Insider article.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Oct 13th, 2010 at 12:47:19 AM EST
[ Parent ]
My fave so far:
Wall Street Begins To Fear Nightmare Foreclosure-Gate Scenario Where All Of Housing Finance Is Wrecked
You can't possibly believe that the Constitution has any legal standing anymore. Are you freaking retarded? If you were to read the US Constiution to a Congressman they'd laugh in your face. We're a banana republic now where the rule of law is whatever the guy with the money and the guns says it is, and that guy ain't you, sucker.

Twank, is that you?
by Bernard on Wed Oct 13th, 2010 at 09:45:08 AM EST
[ Parent ]
I still believe that the problem is so serious that pointy heads in Chicago, DC & NYC are gonna be pushed into a room and ordered to find a way out that reconciles this and protects the banking system.

And I believe that all of those people who have issues with their mortgages, even if they can demonstrate that the paper is worthless, will lose out. Because they'd rather protect the uberclass of financiers than the American middle class.

and if the level of dispossession is sufficiently large, America is heading to a bad place.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed Oct 13th, 2010 at 05:37:51 AM EST
[ Parent ]
Citigroup Call On Implications On Foreclosure Crisis: "Just The Tip Of The Iceberg" | zero hedge
"Our speaker predicted that more and more lenders are likely to stop their foreclosure processes in both judicial and non-judicial states. He also expects more states' attorney generals to get involved. At the federal level, it is possible than banking regulators might step in as there is legal and reputational risk for the banks involved. Ultimately, if these issues do in fact escalate, the Administration may try to broker some sort of settlement. If such deal brokering does take place, Levitin believes that "some payment" will be exacted from the lenders and servicers. The Administration could bargain for more mortgage principal write downs." In other words, the endgame will likely end up being the extraction of material concession from the banking syndicate, in the form of systemic mortgage writedowns, with Obama's blessing, which will likely put the 25% of homeowners who are underwater on equal footing with the other 75%. It may turn out that this was the plan all along. And people naively wonder why banks have hundreds of billions in cash stashed on the sidelines...


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Wed Oct 13th, 2010 at 06:47:06 AM EST
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